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THE EFFECT OF INNOVATION ON
COMPETITIVENESS
Ebru DOĞAN*
Abstract
Pioneering emergence of new markets and expanding competition areas make innovation the basis of
development and dynamism in all economies. In this respect, innovation which creates significant impacts in a
way that increasing and supporting competition can also create impacts that will change qualification of
competition in goods and services markets.
In this study, the effect of the factors determining the innovation on competitiveness for member and candidate
countries of the European Union was analyzed with panel data analysis. Empirical findings obtained have
revealed that two determinants of innovation –knowledge&technology output and creative output- positively
affect competitiveness.
Keywords: Competitiveness, Innovation, European Union
Jel Classification: M19
1. INTRODUCTION
With globalization, companies of developing countries are increasingly feeling the
pressure of making innovation. All areas such as R&D, software, design, engineering,
education, marketing and management are increasingly taking significant roles in the
production of goods and services. In addition, developing international standards dominate
international trade and global value chains. Therefore, competitiveness of companies and
countries depend on their capabilities to make innovations and their orientation to technology
and information. Innovation in developing countries is considered as the basic concept in
addressing social problems such as environmental pollution, health, poverty and
unemployment. Today, the role and importance of innovation have become more significant
than economic achievement (GII, 2015: 81,82).
* Asst. Prof., Istanbul University, Faculty of Economics, Department of Business Administration, Istanbul,
Phone: 0(212) 440 00 00 – 11613, ebruseng@istanbul.edu.tr
İSTANBUL ÜNİVERSİTESİ
İKTİSAT FAKÜLTESİ
EKONOMETRİ VE İSTATİSTİK
DERGİSİ Ekonometri ve İstatistik Sayı:24 2016 60-81
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Thanks to its significant effects in a way that increasing and supporting competition,
innovation has become an important field of activity in companies and the main factor that
increases the dynamism of national economies.
In this study, the relationship of innovation and competitiveness was discussed and the
effect of the factors determining the innovation for member and candidate countries of the
European Union on competitiveness was analyzed.
2. COMPETITIVENESS
Today, globalization affects conditions of competition from various aspects in many
sectors and while it completely changes these conditions in some sectors, it creates significant
differences in some of them. Especially increasing differences in consumer preferences
stemming from technological developments and globalization have necessitated
establishments in global arena to apply highly different competition strategies when compared
to the past.
While examining the concept of “world economy” as a new reality Drucker has
specified mainly these features (Drucker, 1996: 117-120):
- World economy stopped being international and it became global towards the middle
of 1970s. Economies largely entered under the domination of global economies.
- The primary phenomenon shaping global economy is cash flow rather than trade of
goods and service. These cash flows have a distinctive dynamic. Monetary and fiscal policies
of sovereign national states have been increasingly formed in a way that instead of shaping
developments in global monetary and capital markets effectively, they prefer giving reaction
to these developments.
- Labor and natural resources which are the traditional production factors in global
economy have increasingly been in the secondary status. Money is also not a production
factor anymore that will provide competition superiority for a country due to the fact that it
has gained a global qualification and it has become reachable by everybody. Exchange rates
The Effect of Innovation on Competitiveness
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possess importance only for short terms. Management has gained the qualification of being
determinant of production.
- The main purpose in global economy is not profit maximization, but market
maximization. On the other hand, trade increasingly follows investment and it becomes a
function of investment at the end.
- According to economic theory, the only unit, or at least the most dominant unit,
which can create effective economic policies is nation state. On the contrary, there are four
such units in the global economy. The first is national state, the second is regional
integrations, the third is real market which is formed by money, credit and investment flows
and lastly, the fourth is global enterprises which see the whole world as a single market.
- In forming economic policies, mutual relations among the regions have increasingly
become prominent rather than free trade or protectionism.
- The concept of global ecology has become important. In this context, it is necessary
to produce global policies for the environment.
According to Porter, companies should determine a distinctive strategic position in
order to maintain their existence within the intensive competition environment. The strategy
of a company should give the opportunity of suggesting a more different value than its rivals
or presenting a wide range of benefits. A company should carry out more different activities
than its competitors or perform similar activities in different forms in order to establish
sustainable competitive advantage. The aim of establishing competition strategy is to relate a
company with its environment. The structure of sector has a huge effect on both determining
current strategies for the company and detecting competition rules. Competition strategies are
defined as the whole decisions and behaviors providing competition superiority through value
creating and possessed basic abilities for the customers in a certain market (Porter, 2004: 3,4).
World Economic Forum defines “competitiveness” as the sum of institutions, policies
and production factors forming productivity level of a country. Thus, productivity level
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determines sustainable welfare level within the economy. In other words, a more competitive
economy tends to possess the ability to produce higher income levels for its citizens (WEF,
2008: 3).
There is not any country in the world that gains sustainable achievement without
protecting welfare levels of its citizens. Competitiveness explains the purpose of acquiring
long-term growth, creating employment and determining how countries, regions and
establishments will manage their abilities in order to increase welfare levels. When two
countries compete with each other, both of them possess a better position; therefore
competitiveness is defined as a way which provides development and in which there is neither
loser nor winner. Competitiveness of nations is one the most remarkable developments in
modern management (IMD, 2016).
In his study “Competitive Advantages of Nations” Porter, analyses the conditions
which determine competitiveness and examines the reasons of why certain countries are more
successful in certain industries (Porter, 1990a). He has discussed productivity as the most
significant competitiveness concept in national level. The primary target of a country is
providing a permanently increasing living standard for its citizens. The ability to achieve this
is dependent on the use of productivity of workforce and capital within a country.
Productivity is dependent on both qualities of the products and features of products as well as
the activities to be able to produce these products. Productivity is the main determinant of
long-term living standard of a country. Increase of sustainable productivity necessitates an
economy to improve itself continuously. Companies of a nation should continuously increase
the productivities within the current sectors by improving product quality, adding different
features to the products, developing product technology or enhancing production activity
(Porter 1990b: 76,77).
The four main attributes underlying the ability to make innovation of some nations’
companies are discussed in Diamond Model of Porter (Figure 1). These determinants are:
- Factor conditions
- Demand conditions
- Related and supporting industries
- Firm strategy, structure and rivalry
The Effect of Innovation on Competitiveness
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These determinants establish the national environment in which companies are born
and learn how to compete. Every point in diamond model affects the accessibility of resources
and talents needed for competitive advantage and the pressure of making investment and
innovation on information and companies which are the basic elements for the achievement of
international competition. Any industry can be successful if it possesses favorable conditions
in the environment it is active (Porter, 1990b: 78).
Source: (Porter, 1990a: 127)
Figure 1: Competitiveness Diamond
Porter categorizes “factor conditions” as the human resources, physical resources,
information resources, capital resources and infrastructure that a nation has. On the other
hand, “demand conditions” imply the nature of internal market demand regarding product or
service of the sector. The qualification of domestic purchaser gains importance at this point. If
the domestic purchasers are the most satisfactory purchasers of a product or service all around
the world, companies of that country will gain competitive advantage due to the fact that
industries are becoming innovative for meeting these demands. The other determinant of
competitive advantage is the presence of “related and supportive sectors” which are
competitive in international scale within the country. Domestic suppliers which are
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competitive in international scale can create superiority by providing cost-effective inputs
early, rapidly and initially. The last factor is “firm strategy, structure and rivalry”. This factor
includes the conditions affecting the nature of internal competition as well as establishment,
organization and management of the companies. Domestic competition causes pressure of
making innovation on the companies (Porter, 1990b: 78,79,83-85).
Every point in diamond model is related with each other and weakness in any of the
factors will restrict growing and development potential of the sectors. Besides, there are two
external factors which are role of the government and chance factors included to diamond
model. The government has an important but indirect role in developing international
competitiveness of a sector. The government does not create competitive sectors; this can
only be achieved by companies. The thing to be done by the state is not trying to create
competitive advantage, but affecting main elements of the diamond model. In other words, it
means all government policies are made for providing an environment which creates
competitive advantage for companies without directly interfering with competition
environment. At the same time, this factor strengthens the powers forming the diamond even
more. However, chance factor is seen as the situations which are uncontrollable and affect
positions in the competition environment (input costs and large changes in exchange rates,
wars, oil shocks, etc.) (Porter, 1990a: 123-126; Porter, 1990b: 87).
Companies should accept central role of innovation because of the fact that they will
gain competitive advantage due to the innovation activities. They approach innovation with its
broadest sense including both new technologies and new business forms. A company can
maintain competitive advantage acquired with the help of innovation with only continuous
development. Competitiveness of a nation is dependent on its industry’s the capacity of
making innovation and increasing its quality (Porter, 1990b: 73,75,89). In addition,
competitiveness is not only dependent on economic area, but also the works in social areas
and contributions to the society made by companies. While it was thought that economic and
social targets contradicted with each other, today, establishments cannot isolate themselves
from the society in which they are active. Therefore, there is a parallelism between interests of
the society and interests of the company (Porter, 2002: 59).
The Effect of Innovation on Competitiveness
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3. THE RELATIONSHIP OF INNOVATION AND COMPETITIVENESS
There are many different definitions of innovation in the literature. In business
dictionary, innovation is the process of translating an idea or invention into a good or service
(Business Dictionary, 2016).
European Innovation Management Academy defines innovation as “the successful
exploitation of a new product, service, process, organization or new business model which is
new to a company, new to a market or new to the world” (European Innovation Management
Academy, 2016).
According to Drucker, innovation is an action providing source with a new capacity in
order to create welfare and it creates source (Drucker, 1993: 30).
The most comprehensive and widely-accepted definition of the innovation concept is
available on the Oslo Manual co-published by the OECD and the European Commission.
According to Oslo Manual, innovation is the application of a newly or specifically developed
product (good or service) or of a process, a new marketing method or a new institutional
method (OECD-Eurostat, 2005: 45). Based on this definition, the innovation concept may be
classified under four categories (OECD-Eurostat, 2005: 47-51):
- Product Innovation: It is a good or service which is newly or substantially developed
in terms of its intended use. This includes significant improvements/developments in
technical specifications, mechanisms and materials, firmware, ease of use or other functional
features.
- Process Innovation: A newly or substantially developed production or distribution
method. This includes significant changes in techniques, equipment and/or software.
- Marketing Innovation: It is a new marketing method including significant changes in
product design or packet, product placement, product promotion or pricing.
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- Organizational Innovation: It is application of an organizational method in business
practices, organization or foreign relations of the firm.
Today, innovation-based growing is not the ability and privilege of only high-income
countries. Developing countries also tend to establish appropriate policies in order to increase
their innovation capacities. Innovation policies are developed in different forms depending on
the needs of countries and their impacts show differences even though they are in the same
development level. Some of the developing countries have achieved to improve their
innovation inputs and outputs continuously (GII, 2015: V).
OECD relates the increase of a country’s welfare and employment rate with the
capacity of that country to make innovation and adapt it; similarly, the European Union also
considers innovation as an urgent and common issue for Europe. Innovation which forms the
basis of competitiveness is the key of development, sustainable economic growth and social
welfare (MÜSİAD, 2012: 34). Although the relationship between competitiveness and
unemployment is complex, both of them depend largely on efficiency of education system
and labor market. A country enables its citizens possess the necessary talents for providing
efficient employment by training, improving and awarding people appropriately. This is valid
for both developed and developing countries, because talent creates ideas which turn into
powerful innovation and powerful occupational abilities are considered as an important
element for comparative advantage (WEF, 2015: 17,18).
There should be some basic principles for innovation to create competitiveness. In this
context, national innovation achievement principles are as follows (Atkinson and Ezell, 2015:
89-94):
- Innovation policy should focus on maximizing innovation in all sectors.
- Innovation policy should support each kind and phase of innovation.
- Providing creative destruction
-Keeping import prices of capital goods and especially information and
communication technologies low
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- Supporting creation of basic innovation inputs
- Developing national innovation and productivity strategy as well as the institutions
that will support these innovations and strategies.
According to Green Paper on Innovation, “the competitiveness of a country, region or
firm now depends predominantly on its capacity to invest in research, know-how, technology
and the skills which allow maximum benefit to be derived from these in terms of new
products or services” (European Commission, 1995: 6).
Innovation shows up as a result of development of background knowledge and
experience of an enterprise. R&D is a significant activity due to the fact that it provides the
required information and experience for innovation. OECD defines R&D as “creative study
conducted by basing on a systematical background in order to increase amount of information
and develop new practices dependent on this information”. R&D is the precondition of
innovation (OECD, 2016).
Economic progress is an important determinant of a country’s innovation level and
there is a positive correlation between them. As the economies of states gain strength, they
will make more investment on researches. The intensity of R&D (such as percentage of funds
allocated for R&D activities within gross domestic product) has a significant and positive
relation with innovation. Therefore, allocating more funds in this way will cause an increase
in the innovations of Middle and Eastern European countries (Petrariu, Bumbac and Ciobanu,
2013: 23).
Information is one of the most important driving powers in the development of R&D
activities which play a major role in economic growth. Countries which produce information
and transform it into added value have taken their places as the most successful countries
within the global competition environment. While the most important driving power in
economic growth is information, human resources is also an indispensable element as the
most significant tool in the production, transfer and use of information. For this reason,
improvement of human resource dependent on information possesses a great importance in
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the transformation of fiscal resources invested in R&D activities into added value and
providing a sustainable economic growth. The allocated resources, sub-structures, technology
transfers for R&D activities will remain inactive unless the human resource that will assess
these investments efficiently is found and they will not serve for improving competitiveness
(MÜSİAD, 2012: 124).
Innovation is the basis for development and dynamism in all economies. Enterprises in
many OECD countries make investment in the knowledge-based assets (software, database,
R&D, abilities peculiar to the enterprise and institutional capital) that will lead innovation. In
addition, billions of people’s using internet and being in interaction with each other all around
the world, including developing economies, enable the dissemination of information and
creation of more advanced innovations. The said and other technological developments in
biotechnology and nanotechnology areas and in the related areas with improved materials will
cause a continuous transformation in the structures of production, occupations, economic
activity locations as well as the structures of roles in different sectors within the economy.
Governments have important roles in improving innovation environment such as making
investment in innovation institutions, helping remove the obstacles of innovation and
establishing basic public policies that will contribute to innovation. 2015 OECD Innovation
Strategy set forth concrete agendas that would strengthen innovation performance and the
strategy put these into practice for stronger, greener and more comprehensive growing. The
strategy set forth 5 priorities that would provide a comprehensive and action-based approach
regarding innovation for politicians. Most of them are the priorities that can be applied in the
economies which are in difficult situations fiscally and they can be listed as follows (OECD,
2015: 3,4):
- Strengthening innovation investments and encouraging business dynamism.
- Making and regulating an efficient system investment in creating and disseminating
information.
- Understanding benefits of digital economy.
- Encouraging talents and abilities and optimizing use of these talents and abilities.
The Effect of Innovation on Competitiveness
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- Improving inspection and application of innovation policies.
In addition to the abovementioned matters, innovation as the main determinant of
improvement in productivity leads to value creation for human capital, physical and
information-based capital. This value creation increases the total income and has a positive
effect on general living standard. Education system is the basis of innovation and productivity
including recognizing benefits of the future production revolution. Along with this, OECD
assessments show that in total only one third of all adults possess the abilities needed for
technologically rich environments. Many disciplines are related with subjects dealing with
more comprehensive abilities such as creativeness and critical thinking. The basic principle is
creating an environment that will provide individuals with the opportunity of choosing and
gaining suitable abilities and even support optimal use of these abilities (OECD, 2015: 6,13).
The concept of innovation is associated with unique inventions, processes and
systems which will enable development in a modern society and change lives of individuals.
Besides, innovation for states should incorporate more than individual inventions or steps. It
should be seen as a process which incorporates new ideas into the economy and changes the
product to be manufactured and the way how it will be manufactured and organizes the way
of manufacturing the product. Innovation is the indicator of a successful economy and it leads
economic development and creates new business areas. Moreover, innovation is a tool which
enables a successful competition with high-quality low-wage economies for a high-quality
high-wage economy without decrease in living standards (Figure 2). Low-wage countries
have been investing in education, researches and business innovations; thus, for example the
uphill task for the USA should be making innovation more rapidly and efficiently than its
competitors (National Governors Association, 2014: 1).
Source: (Dulupçu v.d., 2007: 9)
Figure 2: Innovation and Competitiveness
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As a result of the fact that technology and innovation processes have gradually
become determinants in competition, use of new technologies and capacity to make
innovation have become prominent as the most crucial component of competitiveness and
they have become one of the basic conditions of companies’ sustaining their existence within
the global economy (Akis, 2015: 1312).
In a study conducted by Iosif on member states of the European Union, the impact of
variables affecting the innovation which took place within the scope of Innovation Union
Scoreboard on competitiveness was examined and it was concluded that human resource and
intellectual capital factors had impact on competition (Iosif, 2014: 670).
4. ASSESSMENT OF GLOBAL INNOVATION AND COMPETITIVENESS
INDICES
There are certain indices which define the place of a country in the world in terms of
innovation and competitiveness. This study involves two key indices which are most widely-
accepted and distinguished with a huge number of countries it encompasses as the Global
Competitiveness Index and the Global Innovation Index.
Global Competitiveness Report is published by the World Economic Forum on annual
basis. This Report uses Global Competitiveness Index. Global competitiveness index is
composed for the quantitative measurement and ranking the countries by their
competitiveness. This index is widely comprehensive, enables the analysis of micro and
macroeconomic situations in terms of national competitiveness; and consists of 12 pillars
influencing competitiveness.
These pillars:
- Basic Requirements Subindex: Institutions, infrastructure, macroeconomic
environment, health and primary education.
- Efficiency Enhancers Subindex: Higher education and training, goods market
efficiency, labor and market efficiency, financial market devolopment, technological
readiness, market size
The Effect of Innovation on Competitiveness
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- Innovation and Sophistication Factors Subindex: Business Sophistication and
innovation
The 2015-2016 report covers 140 countries. This report groups and analyzes the
countries by per capita income (Table 1).
Table 1: Member and Candidate Countries/Economies of European Union at Each
Stage of Development (2015)
Stage 1
Factor-driven
Transition
from stage 1
to stage 2
Stage2
Efficiency-driven
(5 Economies)
Transition from stage
2 to stage 3
(7 Economies)
Stage 3
Innovation-driven
(21 Economies)
______
______
Albenia - Bulgaria,
Makedonia -
Montenegro - Serbia
Croatia - Hungary -
Latvia, Lithuania -
Poland, Romania -
Turkey
Austria - Belgium -
Cyrpus - Czech
Republic - Denmark -
Estonia - Finland -
France -Germany -
Greece - Ireland - Italy
- Luxembourg - Malta
- Netherlands -
Portugal - Slovakia -
Slovenia - Spain -
Sweden - United
Kingdom
Source: (WEF, 2015: 38)
Global Innovation Index provides a rich dataset for the release and analysis of the
global innovation trends. GII measures the innovation capacities of the countries across the
world. It provides comparative analyses which facilitate the understanding of the differences
in innovation capacities.
The 2015 Global Innovation Index, of which main theme has been determined as
Effective Innovation Policies for Development, examines the innovation capacities of 141
countries under various components. This Index relies on two sub-indices as Innovation Input
Sub-Index and Innovation Output Sub-Index, and 79 indicators. (The Global Innovation
Index, 2015: 9): In calculating Innovation Index score, input and output sub-indices have
equal weight. The sub-indices:
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- Input Sub-Index relies on 5 key pillars consisting of 3 indicators.
• Institutions: political environment, regulatory environment, business environment
• Human Capital and Reseach: Education, teritary education, research development
• Infrastructure: ICTs, general ınfrastructure, ecological sustainability
• Market sophistication: Credit, investment, trade&competition
• Business sophistication: Knowledge workers, ınnovation linkages, knowledge
absorption
- Output Sub-Index relies on 2 key pillars consisting of 3 indicators.
• Knowledge and technology outputs: Knowledge creation, knowledge impact,
knowledge diffusion.
• Creative outputs: Intangible assets, creative goods and services, online creativity.
In general, R&D (R&D expenses and R&D personnel) and patents are taken into
consideration as innovation indicators. In innovation process, while R&D activities are
regarded as input indicators, patents which are outputs of R&D activities are regarded as
output indicators. Innovation is no longer just developed in R&D laboratories is not limited
with patent or scientific publications. From the point of view, GII takes into account of both
traditional and new emerging perspectives and several indicators without ignoring the
previous approaches (Karaata, 2012: 11).
When the 2015 indices are examined, as is seen on Table 2, 7 out of the countries
ranking first 10 in innovation index also rank in first 10 countries in competitiveness power
index. In both indices, the dominance of the EU countries in first 10 draws attention.
The Effect of Innovation on Competitiveness
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Table 2: Global Innovation Index and Global Competitiveness Index Rankings
(Top 10 Country/2015)
Global Innovation Index Rank
İnnovation Top 10
The Global Competitiveness Index Rank
Competitiveness Top 10
1 Switzerland 1 Switzerland
2 United Kingdom 2 Singapore
3 Sweden 3 United States of America
4 Netherlands 4 Germany
5 United States of America 5 Netherlands
6 Finland 6 Japan
7 Singapore 7 Hong Kong
8 Ireland 8 Finland
9 Luxembourg 9 Sweden
10 Denmark 10 United Kingdom
Source: (WEF, 2015: 7; GII, 2015: xxx)
When innovation output sub index examined due to the fact that innovation outputs
are a result of innovation activities within the economy, the top 10 countries in the Innovation
Output Sub-Index this year are Switzerland, Luxembourg, the Netherlands, Sweden, the UK,
Iceland, Ireland, Germany, the USA, and Finland. Eight of these countries are already in the
GII top 10. These countries translate their robust innovation capabilities into high level
innovation outputs (GII, 2015: 15,22,24,43).
Table 3 indicates the ranking of indices of 28 EU countries and 5 candidate countries.
Accordingly,
- 9 European Union countries (Germany, Netherlands, Finland, Sweeden, United
Kingdom, Denmark, Luxemburg, Ireland, Austria) are in the Top 20 countries of GII and
-8 European Union countries (Germany, Germany, Netherlands, Finland, Sweeden,
United Kingdom, Denmark, Belgium, Luxembourg) are in the Top 20 countries of GCI.
Candidate countries (Turkey, Macedonia, Montenegro, Albenia, Serbia) can not take place in
the Top 50 of both indexes.
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Table 3: Global Innovation Index and Global Competitiveness Index Rankings
(Member and Candidate Countries of European Union /2015)
Countries Global Innovation
Index-Rank
Global
Competitiveness-
Rank
Countries Global Innovation
Index-Rank
Global
Competitiveness-
Rank
Germany 12 4 Italy 31 43
Netherlands 4 5 Latvia 33 44
Finland 6 8 Malta 26 48
Sweden 3 9 Turkey * 58 51
United Kingdom 2 10 Romania 54 53
Denmark 10 12 Bulgaria 39 54
Belgium 25 19 Slovenia 28 59
Luxembourg 9 20 Macedonia*, 56 60
France 21 22 Hungary 35 63
Austria 18 23 Cyprus 34 65
Ireland 8 24 Slovak Republic 36 67
Estonia 23 30 Montenegro* 41 70
Czech Republic 24 31 Croatia 40 77
Spain 27 33 Greece 45 81
Lithuania 38 36 Albania * 87 93
Portugal 30 38 Serbia * 63 94
Poland 46 41
* Candidate Countries
Source: (WEF, 2015: 7; GII, 2015: xxx)
Turkey holds its place among “Countries of Transition from productivity to
innovation” in the 205-2016 Report. The countries in this group should further focus on
innovation due to their transition to innovation-based development phase. While Turkey ranks
58 in Innovation Index, it ranks 51 in Competitiveness Index. Turkey is the most
advantageous country among the other candidate countries in terms of competitiveness. The
European Union, of which we intend to be a part, has evolved our vision as becoming a
country with the highest competitiveness power and the most dynamic knowledge-based
economy. A National Innovation System is the backbone of a knowledge-based economy.
This system would produce new information, and the science and technology which is the
source of the information, and serve as a tool facilitating the creation of high value-added
based on qualified labor force, and hence, gaining global competitiveness power (TÜBİTAK,
2004: 31). According to the European Innovation Management Academy Survey, the key
innovation priority of Turkey is to develop its innovation and entrepreneurship skills as well
as its education system (WEF, 2015: 102). The rapid changes across the world in science and
technology pose both an opportunity and a risk for Turkey as for the other developing
countries. Turkey will be able to increase its competitiveness provided that it increases its
labor capacity and innovation capacity using its young population and the increasing training
and research facilities, and that it achieves the transformation to knowledge-based production
(Ulengin, Ekici and Tamer, 2014: 45).
The Effect of Innovation on Competitiveness
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5. EMPIRICAL ANALYSIS
This study is aimed at analyzing the effect of the factors determining innovation on
competitiveness Data obtained within the scope of member and candidate countries of the
European Union were annually acquired from Global Competitiveness Index 2011, 2012,
2013, 2014, 2015 and The Global Innovation Index 2011, 2012, 2013, 2014, 2015. These
years was considered as dataset due to the lack of same data previously. A member state of
the EU, Malta was excluded from the analysis because of missing data of the year 2011. The
effects of the factors determining the innovation on the competitiveness of the above-
mentioned countries were researched with Panel Data Analysis.
Choosing between Fixed Effects and Random Effects, the Hausman Test is used in
deciding which one to be used (Greene, 2003: 301). According to the Hausman test results,
Fixed Effects Model is valid rather than Random Effects Model (Table 4).
Table 4: Hausman Test Results
Statistical Value
Hausman Test 31.06***
Note: *** indicates that it is significant at 1% confidence level.
As can be seen in Table 5, the coefficients belonging to the variables of knowledge-
technology output and creative output were found to be statistically significant. According to
the F statistics of the model, it was considered to be significant as a whole. The model was
calculated by using all of the input and output variables. However, input variables were
excluded from the model due to being insignificant.
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Table 5: Results of Fixed Effects Model
Variable Coefficient Standard error T statistics
knowledge and
technology output
0.004586
0.001199
3.83***
creative output
0.004638
0.001235
3.76***
_cons
4.262736
0.076005
56.08***
R-sq: within = 0.1742
between = 0.7986
overall = 0.7441
F statistics
(Probability value)
12.87
(0.0000)
Note: *** indicates that it is significant at 1% confidence level.
Regarding the coefficient values, the variables of knowledge-technology output and
creative output positively affect the competitiveness due to the positive values of their
coefficients. Accordingly, 1-unit of increase in knowledge-technology output causes 0.0045-
unit of increase in competitiveness; 1-unit of increase in creative output causes 0.0046-unit of
increase in competitiveness.
6. CONCLUSION
Innovation being the basis of development and dynamism in all economies is also a
determinant of competitiveness defined as the sum of institutions, policies and production
factors forming the productivity level of a country. Due to this important role of innovation,
companies approach innovation with its broadest sense including both new technologies and
new business forms. The fact that companies will obtain the competitive advantage acquired
with the help of innovation activities and maintain this advantage with continuous
development will also increase the national competitiveness. Nevertheless, national
competition creates the innovation pressure on companies.
Because of this relation between innovation and competitiveness, the effect of the
factors determining the innovation for member and candidate countries of the EU on
competitiveness was analyzed and it has been concluded that knowledge-technology output
and creative output positively affect competitiveness. Accordingly, 1-unit of increase in
knowledge-technology output causes 0.0045-unit of increase in competitiveness; 1-unit of
increase in creative output causes 0.0046-unit of increase in competitiveness.
The Effect of Innovation on Competitiveness
78
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